(a) Valuation.
(1) Initial valuation. Except as provided in paragraph (a)(2) or (3) of this section, a
credit transaction with an affiliate initially must be valued at the
greater of—
(i) the principal amount of the transaction;
(ii) the amount owed
by the affiliate to the member bank under the transaction; or
(iii) the sum of—
(A) the amount
provided to, or on behalf of, the affiliate in the transaction; and
(B) any additional amount
that the member bank could be required to provide to, or on behalf
of, the affiliate under the terms of the transaction.
(2) Initial valuation of certain acquisitions of
a credit transaction. If a member bank acquires from a nonaffiliate
a credit transaction with an affiliate, the covered transaction initially
must be valued at the sum of—
(i) the total amount of
consideration given (including liabilities assumed) by the member
bank in exchange for the credit transaction; and
(ii) any additional amount that the
member bank could be required to provide to, or on behalf of, the
affiliate under the terms of the transaction.
(3) Debt securities. The valuation principles of paragraphs (a)(1)
and (2) of this section do not apply to a member bank’s purchase of
or investment in a debt security issued by an affiliate, which is
governed by section 223.23.
(4) Examples. The following are examples of how to value a member bank’s credit
transactions with an affiliate.
(i) Term loan. A member bank makes a loan to an affiliate that has
a principal amount of $100. The affiliate pays $2 in up-front fees
to the member bank, and the affiliate receives net loan proceeds of
$98. The member bank must initially value the covered transaction
at $100.
(ii) Revolving credit. A member bank establishes
a $300 revolving credit facility for an affiliate. The affiliate has
drawn down $100 under the facility. The member bank must value the
covered transaction at $300 throughout the life of the facility.
(iii) Guarantee. A member bank has issued a guarantee
to a nonaffiliate on behalf of an affiliate under which the member
bank would be obligated to pay the nonaffiliate $500 if the affiliate
defaults on an issuance of debt securities. The member bank must value
the guarantee at $500 throughout the life of the guarantee.
(iv) Acquisition of a loan to an affiliate. A member bank purchases
from a nonaffiliate a fixed-rate loan to an affiliate. The loan has
an outstanding principal amount of $100 but, due to movements in the
general level of interest rates since the time of the loan’s origination,
the member bank is able to purchase the loan for $90. The member bank
initially must value the credit transaction at $90 (and must ensure
that the credit transaction complies with the collateral requirements of section
223.14 at the time of its acquisition of the loan).
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(b) Timing.
(1) In general. A member bank engages in a credit transaction with an affiliate
at the time during the day that—
(i) the member bank becomes
legally obligated to make an extension of credit to, issue a guarantee,
acceptance, or letter of credit on behalf of, or confirm a letter
of credit issued by, an affiliate;
(ii) the member bank enters into a cross-affiliate
netting arrangement; or
(iii) the member bank acquires an extension of credit to, or guarantee,
acceptance, or letter of credit issued on behalf of, an affiliate.
(2) Credit transactions by a member bank with a
nonaffiliate that becomes an affiliate of the member bank.
(i) In general. A credit transaction
with a nonaffiliate becomes a covered transaction at the time that
the nonaffiliate becomes an affiliate of the member bank. The member
bank must treat the amount of any such credit transaction as part
of the aggregate amount of the member bank’s covered transactions
for purposes of determining compliance with the quantitative limits
of sections 223.11 and 223.12 in connection with any future covered
transactions. Except as described in paragraph (b)(2)(ii) of this
section, the member bank is not required to reduce the amount of its
covered transactions with any affiliate because the nonaffiliate has
become an affiliate. If the nonaffiliate becomes an affiliate less
than one year after the member bank enters into the credit transaction
with the nonaffiliate, the member bank also must ensure that the credit
transaction complies with the collateral requirements of section 223.14
promptly after the nonaffiliate becomes an affiliate.
(ii) Credit transactions by a member bank with a
nonaffiliate in contemplation of the nonaffiliate becoming an affiliate
of the member bank. Notwithstanding the provisions of paragraph
(b)(2)(i) of this section, if a member bank engages in a credit transaction
with a nonaffiliate in contemplation of the nonaffiliate becoming
an affiliate of the member bank, the member bank must ensure that—
(A) the aggregate amount of the member bank’s covered transactions
(including any such credit transaction with the nonaffiliate) would
not exceed the quantitative limits of section 223.11 or 223.12 at
the time the nonaffiliate becomes an affiliate; and
(B) the credit transaction complies with the
collateral requirements of section 223.14 at the time the nonaffiliate
becomes an affiliate.
(iii) Example. A member bank with capital stock and surplus of $1,000 and no outstanding
covered transactions makes a $120 unsecured loan to a nonaffiliate.
The member bank does not make the loan in contemplation of the nonaffiliate
becoming an affiliate. Nine months later, the member bank’s holding
company purchases all the stock of the nonaffiliate, thereby making
the nonaffiliate an affiliate of the member bank. The member bank
is not in violation of the quantitative limits of section 223.11 or
223.12 at the time of the stock acquisition. The member bank is, however,
prohibited from engaging in any additional covered transactions with
the new affiliate at least until such time as the value of the loan
transaction falls below 10 percent of the member bank’s capital stock
and surplus. In addition, the member bank must bring the loan into
compliance with the collateral requirements of section 223.14 promptly
after the stock acquisition.
